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Month: December 2014

While most of us tend to think of prices as a sheer number, pricing and valuation is actually embedded deeply into the human perception.

As a result, when you want to fight the otherwise natural commoditization of your prices you have to produce much more than a new price list. Why? Simply because prices are subject to negotiation and if you don’t train your sales force to defend it, your new price list is worthless… or because value is a matter of perception, and as it always goes with perception, it varies widely with people and market segments…

If there was but one lesson to be learned, it is thatpricing optimizationis a lot more than just reviewing your prices. As a matter of fact, it is worthless to work on your pricing if you fail to deliver the message about your value proposition to your customers. And this will undoubtedly happen if you fail to convey your newpricing strategywithin your own organization. In this article we’re going to detail a bit further a few of the best practices that could help you do just that.

Rule n°:1 no pricing optimization can succeed without support from the top

Nothing is more destructive than a misalignment between the management team and the top hierarchy. Because every change in a company is subject to opposition, the last thing you want is your new policies being overruled by the boss, just because he’s focused on something else. Beside, every pricing strategy has to be aligned with the overall strategy of the company. If the goal is solvency, your pricing strategy has to aim at returning as much cash as possible, and if the goal is profitability, it has to reflect that goal… The general idea is that pricing engages the company as a whole and it needs support from the top before cascading down the hierarchy.

Rule n°2: Develop a pricing culture and adhesion

Once you have support from the top, it’s not enough to fire off some new price list. As stressed in the introduction, if nobody on the terrain is willing to defend your new pricing, it is an uphill battle that you’ll never be able to win. Bottom line is : “it all comes down to culture”.

Yourpricing optimizationprocess will be worth something only if you invest your time in developing a strong Pricing culture so that your teams on the ground understand what the stakes are before they shoot a discount or a rebate. You’ll have to communicate your value & pricing strategies with guidelines and tips so that they are able to effectively defend your pricing power and eventually your margins.

Rule n°3: set clear goals and define responsibilities

The third step is to deploy a realistic and detailed roadmap for pricing performance improvement. You’ll have to drill down to the sales unit level and design an incremental plan with clear steps and goals along the way.

You’ll also have to establish clear responsibilities and accountabilities for pricing performance within your organization. Rule n°3, while often overlooked is actually of the utmost importance if you don’t want your pricing improvements plan to remain wishful thinking.

Rule n°4: develop an adapted toolbox

As we always say, prices are the forefront of the economic battle. And it is prone to tactical adjustments. While you should never deny your sales team the right to make these adjustments, you need to be sure that they are not sacrificing your bottom line for short term wins. The problem is that often, prices are negotiated on the fly. This is why when your salespeople are too eager to close the deal, they’ll overlook every price optimization process that is too time consuming. To support the effective implementation of your plans you need to address this problem by developing a toolbox that will help them make the right decision even when under stress. Furthermore, you need to leverage best practices and key insights from across the divisions to ensure engagement. This bottom up approach will help you develop a field tested set of tools that can be flexibly adapted to serve the needs of each division, whilst ensuring greater coherence and comparability.

One way of doing so rapidly and effectively is by deploying a flexible and powerful pricing software (such asPowerPricer) . This will save you the time of developing your ownpricing softwarewhile still having a tool customized to your needs.

Rule n°5: be realistic

Last but not least, always keep in mind your long term vision … but constantly look for short term profit impact. Your grand vision can only arise from the accumulation of small victories. So seek out every opportunity as it is the best way for you to communicate with your market and to learn how to make the greatest bottom line impact

It is the time of the year when we look back at the past 12 months and decide what worked and what didn’t work in our businesses. This is the most common time of the year to re-vamp pricing for the upcoming season. There are many things to consider when it comes to pricing products and services. The worst possible thing to do is to compare your business to another’s business. We are naturally competitive and like to look at our competitors. I do agree it is good to know how you stack up to the competition; however, it isn’t one of the main factors you should consider.

Company Snapshot First and foremost, are you making money? Are you covering your expenses and getting a paycheck? Was there any time this year that you felt under-compensation? In order to answer these questions you need to know how many hours go into certain tasks. I like to break things down to the basics and see how much I am getting paid per hour. This may be scary for some of you, you may find out you are making less than minimum wage due to the time it takes to finish projects. If you are still under pricing yourself and scraping by, stop it! Determine the cost of running your business and how much you want to make next year and charge appropriately. Don’t worry if it is more than your competition, this is where a new marketing plan will come into play to help show the value added to your clients. Bite the bullet and do a major price increase if you need too. Let go of the clients that won’t pay your new price, I promise, you will get new customers that appreciate you and your artwork.

Growth Recognizing growth is probably one of the hardest things for artists. We never see the added value as we are our toughest critics. Compare an image you shot at the beginning of the year to an image you shot at the end of the year. Do you see growth? Has your composition improved or did you learn a better way to light your subject? Did you dedicate time and effort this year to learning and growing? Be objective, are your skills and services worth more next year than what were last year? The answer is probably yes! Unless you have improved leaps and bounds, don’t be afraid to raise your prices a little to compensate for your new skills even if you are a newbie.

StructureCollections, packages, digital rights, bundling, oh my! There are many different pricing structures to consider to yield higher sales. How do you decide what works best? Unfortunately, trial and error is the best way to see what will be most successful for your business. What works for me many not work for you, even if we are in the same or similar markets. There are many samples and information you can buy on the web that may help, but keep in mind you need to take it with a grain of salt and adjust for your business. If something doesn’t work, change it, you don’t have to wait until next year. Your pricing is adjustable at anytime. Once you find a system that works, you won’t have to do a complete re-vamp of pricing every year.

The battle for new subscribers is fierce and one that is fought daily on Canadian soil. Port-in offers were all the rage when the new carriers launched five years ago and WIND is now taking aim at Mobilicity with its latest promo. Until December 31st, WIND is offering a $60 credit to those who make the jump and sign up on the WIND 25 or WIND 35 price plans — for the first six months you’ll receive a credit on your bill of $10 per month.

While Mobilicity might be on its last legs, the carrier is determined not to lose subscribers to a competitor. It took to its social media channel to convince customers to stay, responding to one user: “If you like who you’re with, stay. If you want to change, change. If change, choose us and our $29 deal!”

However, the situation soon got messy as users fired back responses like, “You guys really suck on social media! Instead of being friendly and try to attract a consumer, you prefer to be rude. That’s stupid.” Even ex-CEO Stewart Lyons piped into the rant, stating, “I’m staying out if it!! The whole thing is unfortunate, the feds made a big mess.”

The car-sharing service Uber uses dynamic pricing (also called surge pricing): prices rise in response to local excess demand (where the demand for rides at the current price exceeds the supply of cars), and fall in response to local excess supply (where there are more cars available at the current price than there is demand for them). Uber’s sharp increase in prices in Sydney, where there was a sudden significant excess demand for cars as the result of a downtown hostage taking, has sparked a debate on the morality of dynamic pricing. It’s not an arts example, but since so many arts organizations are experimenting with dynamic pricing (my caveats are expressed here), I think it is worth looking into.

As a preliminary thought, notice that we see prices in competitive markets responding to demand and supply all the time: look at the variations at the grocery store, at the gasoline pump, in the markets for real estate and apartment rentals. If prices didn’t change, we would be constantly seeing severe shortages of some items and overstocks of others. But we don’t see that. And a good thing too. Rising prices in the face of excess demand encourage buyers to look to potential substitutes (as the price of beef rises people look to recipes for chicken), and at the same time encourage firms to increase their supply of the good, until the excess demand is eliminated. Further, the scarce good goes to those people who value it most highly: if beef prices rise relative to chicken, beef will continue to be bought by those with the strongest preference for it, while those who are somewhat indifferent to beef are the ones who switch to buying more chicken.

If Uber uses dynamic pricing, we get the same result, albeit in a situation where one company is doing the price adjustment. In the face of excess demand for rides, the increase in price draws more cars into service, and also encourages people to look for substitute means of travel. The ones who ride with Uber even at the high price would be the ones who see no viable substitute. If prices don’t rise when there is excess demand, we have a shortage, and the people who catch a ride are the people lucky enough to book a ride first. These are not necessarily the people who value the ride the most.

I don’t think anything so far is very controversial, it’s textbook stuff. And it is hard to see any moral objection to it.

Until we get to the situation of a crisis. If the demand for rides has sharply risen because of a crisis situation, as happened in Sydney, does surge pricing become immoral?

As the Sydney Opera House and other buildings were evacuated and images flashed on TV screens of hostages holding a flag bearing the message “There is no God but Allah” and “Mohammed is the messenger of God,” Uber tweeted it was raising prices.

The company has defended what it calls “surge-pricing” as necessary to encourage more drivers to pick up passengers when demand is high.

Within an hour, Uber backtracked after the media publicized customer complaints of price-gouging.

The fact that Uber allowed surge pricing during a hostage crisis may lead you to believe that the company doesn’t care about you, and you would be correct. But Uber does not have a responsibility to care about you. Uber is not a government entity, and it is not beholden to the general carless public during an unwelcome drizzle of rain or even a time of great distress. …

The premise of the program is simple supply-and-demand: when demand for cars increases and supply decreases, Uber’s algorithm inflates the fee for rides accordingly, which the company claims encourages more drivers to work, which puts more cars on the road when people are requesting them most.

Surge pricing happens during rush hour and when it rains or snows; it happens on holidays like Halloween and New Year’s Eve; and it has happened during states of emergency like Hurricane Sandy in 2012, after which the New York Attorney General stood Uber down and made them agree not to hike up fares during natural disasters––and he was as wrong as any of Uber’s customers who complain about their inflated fares. …

Uber’s surges are not price gouging, as some have erroneously claimed. Uber––which is actually not the only method of transportation on Earth, despite what it may seem like––warns passengers about the surge before it allows them to order a car, and if the surge is over two times the normal rate, the app forces users to type it in, just to make sure they really understand what they are getting themselves into.

‘Price gouging’ is a meaningless term, so I don’t see much point in getting into debate as to when a price increase is gouging or not. But that term aside, if a price increase during rush hour is acceptable, why not a price increase when disaster strikes?

Is it wrong to raise prices during an emergency? Here’s what Uber has said in the past, and repeated in Sydney on Monday: Surge pricing in times of need is important—even beneficial—because it encourages drivers who might otherwise stay safely at home to hit the streets. This is a fair point. If there’s any time that people should want drivers to be incentivized to pick up passengers, it’s during a disaster or emergency. Raising fares helps make that happen. Of course, the flip side is that as fares goes up, Uber becomes less and less reliable for anyone who can’t afford to drop $100 on a single cab ride. Surge pricing doesn’t make Uber more accessible to everyone during an emergency—just the people who can pay for it.

I don’t buy it (sorry). Rides are bought by those consumers willing to pay the most for them, yes, but that is true of every good and service in the market, from sirloin steaks to tickets to the Chicago Symphony. Without a price increase, the rides would be obtained by … whom? Essentially, those who got lucky. But that doesn’t strike me as a morally superior way to decide who gets a car, and it doesn’t make a difference what was the cause of the price increase.

Prices do a very good job of both aggregating preferences and giving weight to them. In their absence, it can be really hard to allocate goods, which is to say that not using the price mechanism is less efficient than using it. Just ask anyone who lived in a centrally planned economy. It’s also one of the reasons that the market can appear to be so much more efficient than our offices. The market uses prices, while our organizations tend to use command-and-control mechanisms to deal with situations often too complicated for the market to handle. (Shameless plug.) Uber is simply increasing the efficiency of the overall system, and those who don’t see and understand that should learn to.

But I’m pretty well educated about economics, and I still feel a moral twinge about the idea of surge pricing. So what’s going on?

First, I think it has something to do with how people react to prices. Recall the experiment at the Israeli day care [PDF] made famous by Freakonomics. Researchers found that when daycares charged a late fee, $3 for every ten minutes, more parents were willing to be late. What was going on? Once parents could put a price on their lateness – rather than feeling like they were inconveniencing the caregivers – they were willing to pay out of pocket. The moral compunction to be on time was stronger than the late fee.

In the case of the Sydney crisis, you can see a similar logic. Those who object to surge pricing, even those of us who understand it, would rather live in a world where people would do the moral thing – give someone a ride out of the danger zone, without making them pay through the nose. I know we don’t live in such a world, but I sure wish we did. And acknowledging that we don’t feels like admitting failure.

It’s one reason that I don’t pay my kids to do chores around the house. (The other reason is that I’m cheap.) I don’t want them to participate in the life of the family because of money but because it’s what family members do for one another and for the larger group. I’m not just trying to shield my kids from the realization that people are selfish; I’m trying to make them less selfish by eschewing market logic at home. Research has shown that markets don’t just force us to confront our selfishness, but often make it even worse.

Uber’s defenders have failed to acknowledge that this is a perfectly reasonable reaction. … you’d think Uber, whose business relies on being able to attract more users and more drivers, would try to figure out a different system that didn’t rub so many the wrong way.

OK, there is a literature based on why we think some transactions are more, or less, acceptable asmarket transactions. I don’t see the relevance here. In the Israeli day care case, the center found that people were all right with being late if it were treated as a market transaction (and so no guilt), but not if it were a non-market interaction. Sullivan feels the same way (and I share this feeling) about household chores. But Uber is anything but a non-market organization. Rides are market transactions. And I don’t see how it is reasonable for someone in want of a car to say to a driver ‘you owe me this’. Sullivan needs to fill in some spaces in this argument.

And at Demos we have Matt Bruenig. In response to Olivia Nuzzi’s claim about higher prices bringing out more drivers he writes:

I am continually surprised by how often journalists just repeat this line without ever asking whether it’s true. I’ve never seen any evidence showing that this actually works in unpredictable emergency situations, and there are good reasons to believe that it wouldn’t.

In a situation where surges happen at predictable times, e.g. during rush hour or on weekends, drivers are able to schedule their “shifts” to take advantage of those times. But this is not true in an emergency situation that is, by its very nature, totally unpredictable. We have no idea whether and to what extent drivers who don’t plan to be on the road at a particular time monitor the app to for surge opportunities and hustle out to capture them. It’s plausible that they don’t do it much at all.

Bruenig claims that supply might not be as elastic as we think. It’s an empirical question; I think we can all agree that the supply of rides increases to some degree in response to an increased price, but that we don’t know how big the effect is. He goes on:

You may wonder why Uber would therefore choose to surge in emergency situations. Partly this could be driven by algorithms that can’t tell the difference. But it’s also the case that, even if surge pricing doesn’t jack supply (as Uber’s reassurances claim), it still maximizes profit in a demand shock. In an emergency situation where demand shoots up but supply can’t adequately respond, Uber’s profit-maximizing move is to jack prices so that it allocates its low supply of rides to the highest bidders.

This is the most problematic part of surge pricing that always goes unnoticed. In an equal society, jacking prices when demand outstrips supply causes those who need/want the rides the most to get them. In an unequal society, jacking prices when demand outstrips supply causes those who have the most money to get the ride. Despite the taunts of irrationality you read from journalists, it is actually totally “rational” for someone on the bottom end of an unequal economic distribution to prefer keeping the prices low, thereby allocating the rides by lottery, rather than allowing them to be jacked up, thereby allocating the rides by wealth.

His error here is to think that it is only when there is a price ‘surge’ that goods go to the highest bidders. But goods and services always go to the highest bidders. Admission to the Art Institute of Chicago goes to those who are willing to pay $18 or more to get in, and does not go to those who are not willing to pay $18. This is not a situation unique to Uber or to dynamic pricing – it’s everywhere.

A long post; where am I going with this?

When goods and services are priced such that supply meets demand, then those who are willing to pay the most for any particular good are the ones who end up buying it. That’s true for all goods and services that are sold for money, and it’s true whether a price is rising or falling. To criticize dynamic pricing because in a ‘surge’ it is is only those willing to pay the price who get the good or service, is to criticize the price system at its core. That’s not unheard of, but it is a very radical stance, and should be recognized as such.

And so I am going to back Uber here. Prices of scarce goods should rise in emergencies, as they already do in ordinary situations when excess demand arises, to encourage more supply, to encourage those who can find a substitute to use it, to get the goods to those who value them most. If I really needed a ride somewhere, I would rather pay an inflated price than find there are no cars to be had at all.